FDIC floats wind-down plans, securitization rules

By IBT Staff Reporter On 05/11/10 AT 12:16 PM

The largest U.S. banks would be required to submit to regulators plans for their dismantling in times of severe distress, and securitizations with higher underlying standards would get federal protection, under two proposals to be considered by the Federal Deposit Insurance Corp on Tuesday.

The staff of the FDIC recommended that the board formally propose a new rule that would have about 40 of the nation's largest deposit-taking banks submit to regulators essentially a living will.

The submission would include analysis and plans that show the insured depository bank's ability to be separated from its parent company and be wound down in an orderly fashion.

The measure is similar to reforms being considered in Congress that would require the largest financial firms to submit living wills. That reform is designed to reduce the impression that some firms are too big to fail.

The FDIC's proposal would not apply to large bank holding companies, just to the deposit-taking banking unit.

The other proposal to be considered before the FDIC board is a rule that could entice banks into producing more responsible securitizations, as part of a larger effort to rein in the risky practices that helped fuel the recent financial crisis.

The FDIC would provide banks with safe harbor protection for securitizations if banks met higher underwriting standards and retained ownership interests in the loans.

Securitizations that met those standards would be protected from seizure if a bank failed.

The rules would be voluntary, but regulators hope banks will follow them because the protection and higher standards could mean better credit ratings and prices for the securitizations.